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Digital Realty Trust owns over 60 data center properties, comprising more than 11.5 million rentable square feet, in over 25 markets throughout North America and Europe, and it is constantly hunting for more markets to build in, said Chris Crosby, senior vice president of sales and technical services at Digital Realty Trust.

When Digital Realty went public in 2004, the company owned 24 properties. In less than three years, it nearly tripled the number of properties in response to demand, Crosby said. "Clearly, there is a trend towards consolidating data centers. Companies with closet-sized data centers are outgrowing them and moving to much larger spaces," Crosby said.

Recent IDC market-sizing and forecast results for the worldwide IT leasing and financing market showed that this market exceeded $70 billion worldwide in 2006 and will pass the $100 billion mark by 2010, growing at a compound annual growth rate of more than 8%. These results includes the leasing or financing of IT equipment, software and IT-related services.

Managed hosting

Managed hosting facilities are attractive to businesses because they can rent IT infrastructure instead of investing in it themselves. Servers, networks, applications, bandwidth and other equipment are managed by employees of the facility.

For Tim Donahue, founder of online stock photography Web startup, BigStockPhoto.com, the need for data storage, servers and perpetual network connectivity was not something he wanted to, or could, manage on his own. Donahue houses his servers at a data center run by a Texas-based company called The Planet, which owns and operates six hosting facilities in the state.

"I don't want to worry about my network going down, and [The Planet] had much better connectivity than I could have gotten into my building," Donahue said. "There is a lot more security and protection from disasters, and the scalability was attractive."

Donahue's entire operation ran on a single server about two years ago and now requires 10 -- a number Donahue expects to multiply in concert with the growth of BigStockPhoto.

Data center supply and demand

The growing demand for data center hosting from people like Donahue has The Planet combing the country for places to build new facilities, said Urvish Vashi, The Planet's director of product management. About 70% of The Planet's business comes from e-commerce-based businesses, he said.

"Companies that are looking to sell their product online need constant network connectivity and redundant power, but they may not have the capital to invest in the infrastructure, especially when they experience tremendous growth quickly," Vashi said.

A startup company can rent one or two servers on a monthly basis, and can add servers and storage continually as they grow, or temporarily during busy periods of the year, Vashi said.

"Companies who run online shopping sites, for instance, see their traffic increase dramatically during the Christmas season, and they need more computing power at that time. It's easy to add servers quickly with (a managed hosting) type of setup and scale back when the season ends," Vashi said. "We have seen customers grow 10% to 20% each month, and they were able to accommodate that growth with us."

The other 30% of The Planet's customers are comprised of small and midsized businesses that do not want to invest in data center infrastructure and staffing, but need a reliable network for internal applications and email, Vashi said.

The cost advantage of managed hosting

Due to its scale, The Planet is able to pass on the price point advantage it has with vendors like Dell Inc., which provides The Planet's 40,000 servers, Vashi said.

Frost & Sullivan's Stratecast Partners shows companies that subscribe to hosted IT infrastructure services see dramatic savings -- up to 75% -- compared to owning and operating their own facility.

In the research, Stratecast estimated the costs incurred for matching the functionality and quality of service for a company with less than 100 employees. Included in the cost evaluations were servers, security, firewalls, bandwidth, utilities and administration. These results show that over a three-year period, the hosted implementation costs were $24,100 compared with internally managed IT infrastructure costs of $104,600.

"The price is very reasonable, and I don't have to worry about anything. There's no headache, and I just focus on my business," Donahue said.

Collocating your data center

Companies that already own their own servers but don't have reliable network connectivity or power are moving to facilities that do.

Unlike managed hosting facilities where all the equipment is provided, collocation facilities (also spelled colocation) house customer servers in secure, well-connected facilities. Customers rent the space and manage their own servers, but don't have to worry about space, power, network connectivity and cooling issues.

Collocation companies, like 365 Main Inc., said the demand for this type of facility is on the rise. When 365 Main opened its first facility in California in 1999, it took nearly four years to fill that one building. The latest data center facility it built there filled up in less than one year, and the facility it is building now already has a number of signed tenants, said Miles Kelly, vice president of marketing at 365 Main.

"(Collocation) is a quickly growing trend, as is evident with our sales pipeline. We are selling out space as soon as it becomes available, and the sheer volume of interest in our data center facilities shows me this," Kelly said.

Earlier this year, the California-based company expanded to Los Angeles; Phoenix, Ariz.; and Chantilly, Va. It now has nearly 1 million square feet under management and is in the midst of building a 200,000-plus-square-foot facility in Oakland, Calif., slated to open this summer, Kelly said.

In December, 365 Main introduced a national program called SCALE 365 in which the company will make large amounts of high-end data center real estate available at wholesale rates.

When leasing a space from a company like 365 Main, the cost of the lease depends mainly on power use. A company that puts 15 1U servers in a rack will pay for the power it draws from those servers. If it replaces those 1U servers with blades and packs them into the same space, its rent will increase, Kelly said.

What they are paying for is a guarantee -- or close to it, anyway -- that their servers will have continuous power.

The case for collocation

Martin Zacarias, co-founder of the e-commerce company 10-K Wizard, which provides searchable access to Securities and Exchange Commission (SEC) filings, said the first servers it deployed back in 1999 were managed in-house, but persistent problems and quick growth led to the decision to collocate.

"We experienced connectivity speed issues and problems with power reliability. At one point, a couple of blown transformers took our business down for a day and a half," Zacarias said.

Six years ago, Zacarias connected with The Planet, which also provides managed hosting, and housed just one half-empty rack of servers there. Since then, 10-K Wizard has grown about 30% each year and now has about100 servers from a mix of vendors at a collocation facility in Dallas.

The business, which runs large database applications on Linux operating systems, is growing quickly and Zacarias expects to expand his data center footprint at The Planet by about one-third over the next few years, he said.

"We could justify building our own data center at this point, but aside from the investment, we have a number of service level agreements to adhere to and the expertise required would be a significant cost," Zacarias said. "Our domain is not operating a data center."

Who collocates?

Many of the companies that collocate are surprising -- you'd think they would own their own data center, but they don't.

The types of customers that use hosting facilities has evolved in recent years, from mostly small dot-com startups to large enterprises, like Sun Microsystems Inc. and finance giant Charles Schwab Bank, N.A., both of which run their data centers at one of 365 Main's California facilities.

The company also serves as the host data center for companies like Technorati Inc., a popular blog hosting Web site, and Craigslist Inc., the classifieds ad forum for 450 cities worldwide that receives more than 5 billion page views per month.

Since going live with 365 Main in February 2006, Craigslist has experienced zero unscheduled downtime – one of the main advantages of outsourcing IT infrastructure, Kelly said.

Craigslist collocates through 365 Main because the company liked the number of carriers available in the facility. Craigslist has many load balancing and failover schemes within its cage and redundant fiber going to its IP provider, according to 365 Main.

"We have two backups for both power and cooling in our facilities, so if the electricity is cut to one of our buildings, power won't be," Kelly said.

Location, location, location

Power costs are a deciding factor in where a data center is placed for companies like Google, which builds their own facilities. Data center realtors, on the other hand, are more interested in location because they have to go where the demand for space is.

At 365 Main's facility in Phoenix, the cost of power is 5 cents per kilowatt hour, compared to 12 cents in its Segundo, Calif. facility -- but California is where the demand is, so it has built more than one facility there, Kelly said. Places like New York are of interest to 365 Main, but space there is limited.

All three data center hosting facilities interviewed said they are scouring markets for new places to build data centers, but at the same time, they are careful not to overbuild, as happened to developers in the 1990s.

"Demand is cyclical. Outsourcing data centers is more attractive to a business as it grows, and owners want to focus on their core business. They don't want to get into running a huge data center, so they come to us," Kelly said. Right now, the cycle of growth is still positive.

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